The Announcement
On July 30, Prime Minister Andy Burnham announced that English mayors will keep a share of the income tax collected in their regions, along with greater retention of local business rates. His government called it, in the official announcement, “the biggest transfer of power, funding and responsibility from Westminster in a generation.”
The response split along familiar lines. Devolution advocates called it a landmark. Skeptics called it a gimmick. Rebel Labour backbenchers called it an exclusion. All of them are describing the same announcement, which is usually a sign that something interesting is going on.
Before we get to the politics, let us be fair to the theory underneath it. There is a genuinely elegant idea here, and it deserves a patient hearing.
The Theory: Why Local Revenue Matters
The idea is called fiscal federalism, and its sharpest version comes from Charles Tiebout. In a famous 1956 paper, Tiebout argued that when localities keep the revenue they raise, they compete for residents and businesses. A city with good services and reasonable taxes attracts people. A city with bad services and punishing taxes loses them. People vote with their feet.
That competition is a discovery mechanism. Local officials can experiment, and the market - in the form of people and firms choosing where to live and work - reveals which experiments work. Success shows up in the local budget, not in a press release from the center.
This is why smart people believe in tax devolution. When revenue stays local, the incentive of the official is aligned with the health of the place. A mayor who grows the local economy sees the growth in the budget. That is the reward half of federalism, and it is the part of this announcement worth taking seriously.
We have met this idea before on this site. In “The Free Market Is More Democratic Than Voting," we saw how markets aggregate preferences that elections cannot. Tiebout’s competition is the same logic applied to local government: instead of asking voters to choose once every few years, it asks residents and firms to choose continuously, by staying or leaving.
What Was Actually Announced
Now the mechanics, which matter more than the headline.
First, your income-tax rate does not change. Not for you, not for anyone. The reform reallocates revenue between Westminster and local government; it does not alter what any individual pays. We spent an article on “Taxes - Who Actually Pays," and the first lesson there applies here: when a government announces a change in taxation, the first question is who bears the cost. Here the answer is nobody, because no rate moved.
Second, the mayors’ share is linked to local economic growth, as THX News reported in its detail coverage on August 3. The share does not grow because the government is generous. It grows because the local economy grows. A region that grows faster keeps more. A region that stagnates keeps less. That is the design, and it is the most consequential part of the plan.
Third, business-rates retention begins in April 2027, with the income-tax share to follow in stages. And the number everyone cares about - the percentage - is undetermined. Chancellor John Healey confirmed the date, and the exact share will land with his Budget on October 28.
So the rate is unchanged, the share is growth-linked, and the percentage is still to be decided. Keep those three facts in mind. Everything else follows from them.
The Pivot: Reward Without Power
Here is the gap between the theory and the plan. This reform takes the reward half of federalism - a share that grows with local growth - and leaves the power half - the ability to set the rate - in Westminster.
In genuine tax devolution, the mayor has a lever. Want more revenue? Cut the rate to attract firms, or raise it to fund services and defend the decision at the ballot box. The price of locating in your region is something you can actually change. That is what makes the reward earned. It is also what makes the competition real: mayors compete on price, and residents and firms respond.
Under this plan, the mayor gets the reward without the lever. The price of locating in Greater Manchester is still set in Westminster, by the same government that collects the revenue everywhere else. The mayor cannot cut it and cannot raise it. The only tool left is persuasion: begging Whitehall for planning powers, transport funding, and whatever else the center is willing to grant.
Think about what that does to incentives. It is like paying a store manager a percentage of sales while forbidding the manager from setting prices. The manager becomes a lobbyist for foot traffic - energetic, visible, and powerless over the one number that matters. Mayors under this plan become lobbyists for growth, because lobbying is the only lever they have left. The energy that real federalism would direct into competing for residents is redirected into petitioning the center.
We have seen this pattern before. In “Public Choice Theory," we traced how political systems reliably produce concentrated benefits and diffuse costs. This announcement is a textbook case. The credit is concentrated: the prime minister gets the headline, the mayors get the photo opportunity. The costs - a revenue system that still runs through Westminster, with all its claims on the result - are diffuse and invisible. Nobody votes against a reallocation.
And notice who keeps the power. Westminster still sets every rate, still collects every pound, and still decides the percentage in October. It has handed over the promise of revenue and kept the machinery. The announcement is a transfer of credit, not of control.
Compared to What?
The honest question, as always, is: compared to what?
Compared to a block grant, this is a real change. Under the current system, Westminster hands local government a fixed sum and takes back a fixed sum, and the connection between local growth and local revenue is invisible. A growth-linked share gives the mayor a reason to care about the local economy. That is a genuine improvement in incentives, and the proponents of the reform deserve credit for making it.
It is also an improvement that uses knowledge the center cannot have. In “The Information Problem," we saw Hayek’s argument that the relevant facts about a local economy - its bottlenecks, its opportunities, its quirks - cannot be aggregated in a central plan. Linking revenue to local growth is a way of letting local knowledge matter again. Compared to a grant, the share is a step toward Tiebout, not away from it.
Compared to real tax devolution, though, it is a grant in disguise. The share is still decided in Westminster, still collected by the central machinery, and still subject to the equalization mechanism being built alongside it - a standing lever for the center to reallocate whatever the regions earn. A revenue stream whose size is set by the same people who write the checks is not yet a local tax. It is a grant with a growth bonus attached.
The rebels deserve a fair hearing too. Labour backbenchers attacking the plan say it “locks out” the regions without mayors - the counties and shires with no metro mayor to claim the share, as GB News reported. The objection is partly self-interested: the loudest critics represent places that would not receive the share. But the underlying point is structurally sound. A revenue stream tied to a mayoral institution draws a new line across the map of England, and the places on the wrong side of it will have to negotiate their way in.
Notice, though, what the argument reveals. The rebels are fighting over who receives the revenue. Nobody is fighting over who sets the rate, because the rate-setting never moved. The entire quarrel is about the distribution of the reward half. The power half was never on the table.
The Question to Carry
None of this makes the reform worthless. Compared to a block grant, it is progress. Compared to the status quo, it is an improvement in the right direction. Tiebout’s mechanism is real, and the more of it a country can bear, the better its government tends to run. The growth-linked share is worth having.
But progress is not the same as transfer. The announcement moved the promise of revenue and left the levers where they were. That is not federalism. It is the appearance of federalism, with the substance still held at the center.
Next time a government announces a historic transfer of power, ask: who sets the rate? If the answer is still Westminster, the power that moved is the credit, not the lever.